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Argentina: Trading old bonds for new
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China: Market economy and dictatorship still co-exist
[ Argentina ]
Trading old bonds for new
Argentina has pushed through the biggest refinancing deal in the history of international financial markets. At the beginning of the year, its President, Néstor Kirchner, had made an offer to private creditors to swap their bonds. For the investors, the terms of the new bonds are clearly much worse: their nominal value is only one third of the old bonds, they have longer maturities and the interest rates are lower. Despite this, three quarters of the investors have accepted the offer. According to Argentinas government, the deal has reduced the countrys foreign debt from $190 billion to $125 billion. While total public debt remains high, at 72 percent of gross domestic product, the annual interest burden has dropped from $ 10 billion in 2001 to only three billion.
From the outset, Kirchner vowed not to improve the offer thus putting bondholders under pressure with a take it or leave it stance. However, experts believe that it is likely that the government will still come up with a second offer, to improve its standing in the upcoming loan negotiations with the International Monetary Fund (IMF). If this offer will be better than the first one, the government would also have to raise, in retrospect, the value of the bonds swapped in the initial phase. If there will be no second offer at all, bondholders who have not agreed to swap, only have the option of seeking redress through drawn-out court proceedings.
The negotiations with the IMF are particularly relevant for Argentinas position on the international financial market. Of prime importance is the IMFs assessment of the debt restructuring. The high level of participation is an indication that the fund will regard the campaign as a success. However, if Argentina and the IMF do not agree, it will be hard for Argentina to find new private financial backers. Successful negotiations depend on Argentinas willingness to implement basic economic reforms. An agreement is also necessary on the maturity dates for Argentinas IMF debt and on the allocation of new loans. A further important point is the question of how to deal with investors who have not taken up the swap offer.
With its debt restructuring campaign, Argentina has forcefully pushed through its ideas on dealing with financial crises. In late 2001, the country had announced that it was insolvent and had suspended interest payments. In mid-2004, Argentina ended its cooperation with the IMF. However, financial experts consider it unlikely that others will copy Argentinas example. Creditors are now sensitised and will not be caught unaware so easily. Uruguay has already specifically distanced itself from Argentinas model so as to not alarm investors.
Claudia Isabel Rittel